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Student Loans in an International Perspective

Student Loans in an International Perspective

In the late 1940s, a Colombian youth by the name of Gabriel Betancourt dreamt of going to the university even though he came from a relatively poor family. He convinced the manager of the company for which he worked to give him a loan to pay for his studies abroad. 

After he obtained his degree, he was so thankful for the opportunity he had benefited from that he decided to promote a way to institutionalize this type of loan. He successfully lobbied the Government of Colombia and, in 1950, helped to establish the Colombian Student Loan Institute, ICETEX, the first institution of that kind not only in Latin America but in the entire world. 

Today, student loan schemes are operating in more than sixty countries across all continents, making student loans an increasingly important financing mechanism for higher education. This document presents a panorama of international experiences and recent trends. 

After evoking the rationale for student loans, it discusses the development of this form of student finance from a global perspective. It then summarizes the most salient lessons which can be drawn from on-going World Bank projects and activities in support of student loans schemes in developing and transition economies. 

In a growing number of countries throughout the world, public resources are proving increasingly insufficient to finance tertiary education. In these countries, cost-sharing between government and the students is becoming the norm. 

But cost-sharing cannot be implemented equitably without adequate student support mechanisms for academically qualified but needy students. 

There are two ways of offering financial support: through targeted scholarship schemes and through student loan programs that make funds available to all students who wish to borrow for their education. 

A great number of institutions and countries have introduced loan schemes which are repaid from subsequent earnings after graduation. Although there is a great variety of lending schemes from an organizational viewpoint, the basic principles remain the same. 

Students receive loans to cover the direct cost of education (tuition fees, education supplies, including computers) and, in some cases, living expenses until they finish their studies. Then, after a short grace period to find a job, usually from six to twelve months, the graduate starts repaying the loan on a monthly basis.

In most countries, student loan institutions have traditionally been run by public agencies, with the exception of programs administered directly by well-endowed private universities in the United States. 

In recent years, new forms of ownership have appeared: commercial banks offering loans to students on their own initiative, for-profit private agencies in the US, as well as a number of non-profit institutions in developing countries, such as EDUCREDITO in Venezuela. 

FUNDAPEC, in the Dominican Republic, was established as a private foundation in the early 1980s with a one-time donation from Government, after a failed attempt, by the Ministry of Education, at running its own student loan program. 

In Colombia, COLFUTURO was created in the early 1990s as a foundation with capital contributions from both the public and private sectors, with the purpose of offering loans for studies abroad in areas of national priority. 

In Eastern Europe, the European Bank for Reconstruction and Development (EBRD) formed an alliance with a private banking group, ABN AMRO, to offer a loan program to students from Central and Eastern Europe and Central Asia admitted to study for an MBA at three top Western European management schools (INSEAD, IESE and LSE). 

In Bangladesh, the Grameen Bank offers a student loan program for the children of poor families who are already the beneficiaries of small loans for productive activities. Many student loan schemes have a national scope but there are important exceptions. 

Mexico does not have a national student loan program, but a very effective public student loan agency has been operating in the Northern State of Sonora since 1981. In Brazil, in the State of Rio Grande do Sul, a group of alumni created a successful student loan foundation in the late 1970s (FUNDAPLUB). 

SACEV is a non-profit student loan foundation serving the needs of students in Eastern Venezuela. A third analytical dimension of student loan schemes is their organizational setup. Table 2 offers a categorization of programs encountered throughout the world, again with some country and institution examples.

Differences in organizational setup reflect the variety of administrative arrangements and institutional forms of division of labor with respect to the functions and processes involved in the management of a student loan scheme: program design, promotion activities, selection of beneficiaries, disbursements, academic supervision, loan collection, investment of cash flow and reserves, monitoring and reporting. 

FUNDAYACUCHO, in Venezuela, works in partnership with a commercial bank responsible for the financial evaluation of applicants, loan disbursement and collection. A similar arrangement operates in Jamaica, involving a larger number of domestic and foreign banks. 

In Canada and Poland, the government is only responsible for program design, interest rate subsidy, and provision of guarantees against default. The capital used to offer loans to the students is raised by the commercial banks themselves.

Student loan programs are funded from any one of the following sources: government, the students, companies in the productive sectors, alumni and philanthropists, and international agencies (see Table 3 below). 

In addition to the scheduled repayments by loan beneficiaries and the income generated through their own financial investments, public agencies often receive budgetary contributions on an annual basis, either from the national government or from a provincial government. 

These budgetary transfers are used to finance their operating costs and to grant additional student loans. In Brazil, the Caixa Económica Federal receives a set percentage of proceeds from the National Lottery. IFARE in Panama is funded through a payroll tax. 

CONAPE in Costa Rica gets its resources in the form of a five percent tax on the profits of commercial banks. In Hong Kong, a percentage of the gambling tax levied on horse races is used to finance the student loan scheme. 

In some countries, the student loan agencies manage trust funds on behalf of public or private companies, and even on behalf of philanthropists willing to fund student loans according to strict targeting criteria (Sonora Institute). 

ICETEX in Colombia issues educational bonds to mobilize additional resources. In the Dominican Republic, FUNDAPEC has recently been able to increase its coverage thanks to a loan from the Inter-American Development Bank. FUNDAPEC has also established a savings plan available to the families of future beneficiaries. 

A 1992 review of international experience with student loan schemes in both industrialized and developing countries, over half of them in Latin America and the Caribbean, found mixed resultsi . Because of heavily subsidized interest rates, high default rates, and high administrative costs, the repayment proportion of loans has not been very significant in most cases.

 Whenever the interest rate is lower than inflation, the loan is subsidized. Loan programs have traditionally been heavily subsidized to minimize the burden to the students, but this has meant that the student loan agencies have been losing part of their assets as long as they have given out subsidized loans. The longer the repayment period, the higher the subsidy.

Bona Pasogit
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